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Mitigating the Risks of Foreign Suppliers

Question: How can life sciences companies mitigate the products liability risks associated with using foreign suppliers?
Answer: As pricing pressures weigh on medical device and pharmaceutical companies, these companies are increasingly looking to overseas suppliers as a means of reducing their production costs. Although this may their bottom lines in the short run, the products liability pitfalls of using foreign suppliers may eviscerate those savings and exact a larger toll on companies’ profitability and reputations over the long term. This is why it is crucial to ensure that as a life science company, you enter into relationships with foreign suppliers with caution and a strategy for managing risk.

Although many life sciences companies may realize the wisdom of utilizing contracts with their foreign suppliers, these companies may not be aware that jurisdictional hurdles may render even the best contracts essentially unenforceable. The first of these hurdles lies in the difficulty of obtaining personal jurisdiction over foreign suppliers. There is a split of authority over what is sufficient to subject a foreign entity to jurisdiction in the United States. Even if a U.S. court does find personal jurisdiction and enters a judgment against the foreign supplier, the difficulties of enforcing the U.S. judgment abroad often make this a hollow victory. Chinese courts, for example, rarely recognize the expansive personal jurisdiction exercised by American courts.

The alternative—suing the foreign supplier in its own country—poses a separate hurdle as additional complications and expenses attend that route. For instance, in China, foreign lawyers or firms are not permitted to litigate in Chinese courts, court costs are very high, damages are limited, discovery is minimal or nonexistent, and settlements are rare, so you must come ready and prepared to litigate with little ability to build the case through discovery.

In addition to lawsuits with foreign suppliers being more burdensome, the use of foreign suppliers may itself be catalyst for lawsuits. Plaintiffs’ lawyers, emboldened by recent press attention on the flaws of overseas-made products, see companies using foreign suppliers as an easy target and an opportunity to make their favorite accusation, that the company has put “profits over people.” Coupled with this, there have also been indications that in the case involving defective component parts or ingredients manufactured overseas, plaintiffs’ attorneys are asking courts to impose liability on the domestic company, or "OEM," for failure to ensure adequate quality control over its supply chain. That is, even though the defect did not originate with the U.S.-based OEM, emerging theories of liability claim that the OEM is still responsible for the defect in its supplier’s products because it failed to adequately test or otherwise ensure the quality of its component parts.

What can you do?

In order to mitigate risk, life sciences companies will want to be sure their contracts include certain key provisions, including:

  • Indemnification clause;
  • Right-to-Offset clause;
  • Consent to jurisdiction;
  • Arbitration clause; and
  • Requirement that foreign supplier carry products liability insurance.

These suggestions must come with the caveat that the best of provisions may still not be helpful if the contract cannot be enforced. Thus, perhaps the most important step to take when engaging foreign suppliers is to do a preliminary inquiry to establish whether, in the event of a dispute with the supplier or an adverse event involving your product, you could obtain jurisdiction over the foreign supplier. There are several questions that are helpful in ascertaining this:

  • Does the manufacturer ship directly to the foreign state?
  • Is the manufacturer in a country that is a signatory of the New York Convention?1
  • Where was the contract between the foreign supplier and the OEM negotiated?

Although the use of foreign suppliers does offer a way for life sciences companies to deliver products to consumers at a lower price, the products liability risks inherent in foreign suppliers means that OEMs must approach such relationships with caution, or risk incurring expenses far greater than the savings they stood to reap.

1 The "New York Convention," formally known as the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, requires courts of contracting countries to give effect to private agreements to arbitrate and recognize and enforce arbitration awards made in other contracting countries. Notable countries that are not signatories of the New York Convention include Taiwan, Myanmar, and most African nations.

Chuck Bavol, Esq. is a partner at The Bleakley Bavol Law Firm in Tampa, Florida.

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